National Blog

Is the Federal Reserve Insane?

Yes, if one believes that the definition of insanity is doing the same thing over and over again and expecting different results. News reports indicate that, following Wednesday's announcement that the Gross Domestic Product shrank by .01 percent in the fourth quarter of 2012, the Federal Reserve plans to continue pumping money into the economy via the asset-buying program known as "Quantitative Easing." Some reports indicate the Fed may purchase as much as $1.14 trillion in assets this year.

The Fed plans these purchases despite its balance sheet already topping $3 trillion. Clearly, the Fed's aggressive asset purchases have not stimulated the economy - in fact, they have weakened the economy and will likely contribute to further economic problems.

One significant portion of the Fed's asset holdings is government debt. However, the Treasury is not the only beneficiary of the Fed's largess, as the Federal Reserve also buys large quantities of private-sector financial instruments, such as "mortgage-backed securities." Apparently, the Federal Reserve has forgotten how the government's investment in promoting mortgage-backed securities helped cause the housing market to crash in 2007-2008.

Since much of the monetary expansion of "QE" 1, 2, 3, 4-ever, etc. is being held by banks as "excess reserves," the inflationary effects of the Fed’s expansion have not yet been fully felt. However, once banks began circulating the new money through the economy, inflation will likely skyrocket to the point where even the government statisticians will have to notice it.

Thus the American economy, which is still suffering from high unemployment brought about by the last Federal Reserve-created recession, could experience a sudden jolt of inflation, which could result in a return of 70s-style stagflation and will certainly lead to another economic meltdown. The next meltdown is likely to be more severe than even the 2008 meltdown, and, of course, will be used by the big spenders in DC to justify a new round of bailouts, “stimulus,” and inflation. This is why it is vital we take the first steps toward monetary reform this year by passing Audit the Fed legislation. We must also continue fighting the big spenders in both parties for real spending cuts in all areas.